The economy, while not on fire, is steaming along. It expanded at an annual rate of 2.6% during the fourth quarter, and corporate profits climbed 4.6% during 2013, according to the Bureau of Economic Analysis. Employers added 192,000 jobs in March, more than the average of 183,000 over the previous 12 months, according to the Bureau of Labor Statistics.

The Bureau of Labor Statistics provides a fascinating set of data that take employer size into account. According to the most recent report, firms with fewer than 250 employees accounted for 56% of job growth during the second quarter of 2013. That emphasizes how important the expansion of small and medium-sized companies is to the economic recovery.

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Regional banks are getting in on the action. SunTrust Banks Inc.
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of Atlanta reported 6% growth in total loans to an average of $128.5 billion in the first quarter. Commercial and industrial loans were up 8% to a tax-adjusted $58.3 billion, and commercial real estate loans surged 37% to $5.6 billion.

While the residential mortgage meltdown was at the heart of the credit crisis, commercial real estate loan quality also suffered terribly, and SunTrust’s return to strong growth in this category is a sign of a resurgence in the broader economy.

Fed looks likely to stick to policy path

SunTrust on Monday reported first-quarter net income available to common shareholders of $393 million, or 73 cents a share, increasing 16% from $340 million, or 63 cents, a year earlier. Provisions for loan losses more than halved to $102 million from $212 million, as did the annualized ratio of net charge-offs (loan losses, less recoveries) to average loans, which came in at 0.35%.

Here’s a year-over-year comparison of earnings per share for the past five quarters:

Survey

As part of an effort to emphasize its commercial lending, SunTrust today released the results of its annual survey of 500 small and medium-sized businesses across the U.S. The results show plenty of optimism among potential borrowers and quite an opportunity for commercial lenders.

Among leaders of companies with annual revenue ranging from $10 million to $150 million, 65% expect their businesses to improve over the next six months, although only 48% expect the overall economy to improve. Among this group, 48% plan to spend on new technology, 34% want to purchase or lease new equipment, and 36% will open new credit lines or take out new loans to finance the spending. Out of 251 middle-market leaders, 21% plan to buy or lease real estate and 20% may acquire other companies.

Among surveyed leaders of smaller companies with annual revenue ranging from $2 million to $10 million, 63% expect business to improve over the next six months, though they’re less optimistic than their larger peers, as only 34% expect the overall economy to improve. Among this group, 25% expect to open new credit lines or take out new loans. Out of 251 surveyed small-business leaders, 15% plan to buy or lease real estate and 15% plan to acquire another company.

Despite pessimism among business leaders about the economy, with survey participants making predictable complaints about increasing health-insurance costs and other expenses, it appears that after years of belt-tightening and under-investment, small and medium-sized business are ready to borrow.

“This year’s survey and last year’s survey indicate small- and middle-market business leaders continue to be optimistic about their own direction, even though they are less certain on the broader national economy,” Mark Chancy, SunTrust’s head of wholesale banking, said in a phone interview.

The bank’s wholesale segment includes corporate and investment banking, treasury services, commercial lending and commercial real estate lending. SunTrust is working on leveraging the various business units in order to better serve commercial borrowers.

Multi-team approach

SunTrust’s investment banking unit has equity analysts covering 10 broad industry categories, and Chancy’s team is working to leverage that knowledge so the bank’s commercial-lending teams can use the information to help create financing strategies for borrowers. “To be specific, the research analysts don’t pitch commercial clients, but they support our knowledge of that industry as a banking team. We are working to translate all of that intellectual capital in a way that helps our commercial lending teams,” Chancy said.

The bank is emphasizing that multidisciplinary approach to improving service for its corporate, middle-market and small business, feeding the growth of its commercial and industrial (C&I) lending business, which makes up most of SunTrust’s loan portfolio and has provided the bulk of the growth.

But the commercial real estate (CRE) story is a fascinating one, and is the hottest loan-growth area for SunTrust today.

Chancy pointed out that the portfolio was growing from a small base. “We shrunk our portfolio of CRE significantly following the crisis, since we had a predominance of residential real estate developers.”

That points to a very important area of risk for many regional banks. When the real estate market collapsed in 2008, many residential real estate developers walked away from large projects mid-stream, leaving lenders saddled with nonperforming loans secured by partially developed properties that had lost significant value. In many cases, the developers had little “skin in the game,” since even their interest payments made during the development or construction phases were financed by the lenders.

According to Chancy, the banking industry can’t be sure that this will never happen again, but “the underwriting standards in the industry have changed, and it makes the risk of those types of losses lower today, if we enter a similar environment.”

Going further, Chancy said the structures of SunTrust’s commercial real estate loans, including loan-to-value ratios and debt-service coverage, have improved. “We have migrated our book of business in the residential space to the more substantial national and regional homebuilders, who have greater diversification of assets,” he said.

Another important factor is that loans for residential real estate development make up less than 10% of SunTrust’s CRE loans.

The main categories that have equally contributed to SunTrust’s recent CRE growth are regional commercial development, financing for the REIT industry, various services for institutional real estate investors, and SunTrust Community Capital, which invests in and supports affordable housing projects in lower- and moderate-income neighborhoods across the southeast, “and increasingly on the East Coast,” according to Chancy.

On the institutional side, SunTrust is a partner with MetLife Inc.
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co-investing in real estate properties.

SunTrust’s stock closed at $39.20 Tuesday, returning 7% this year, which measures up pretty well, when considering the flat performance of the KBW Bank Index. The shares trade for 11.9 times the consensus 2014 earnings estimate of $3.29 a share, among analysts polled by FactSet. The consensus 2014 EPS estimate is $3.10.

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